Europe's hottest startup capitals: Moscow

This article was taken from the September 2011 issue of Wired magazine. Be the first to read Wired's articles in print before they're posted online, and get your hands on loads of additional content bysubscribing online.

London's startup scene is booming -- you need only read Wired to see that. But what are Europe's other hot digital cities -- and which are the companies and founders to watch? Welcome to Wired's first annual guide to the continent's rising stars.

MOSCOW

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With a large market and eager investors, the Russian capital and its startups are garnering both attention and funding.

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Gallery: Europe's hottest startup capitals: Moscow

ByMilo Yiannopoulos

Population: 11,514,000

Size: 1,081km2

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Global Cities Index ranking 2010: 25

There's little about Russia, and about Moscow in particular, that isn't mildly unsettling. People are different here. To Westerners, the way Russians interact with one another is violent, brutish and perfunctory. The country feels like an island: politically, culturally, technologically, there's something...impenetrable about it. Something that goes way beyond a difference in alphabet.

And yet, for all its otherworldliness, Moscow feels remarkably similar to other startup hubs: stumble upon the right bar and there's the same youthful, directed energy one feels in Berlin and London. Oskar Hartmann, founder of groupbuying site KupiVIP.ru, is German-born, but chooses to live in Moscow, citing a frenetic energy matched only by New York City. "You feel like you're in the centre of the universe," Hartmann says. "It's a historical city, but Moscow's time is here."

European institutions are taking note of the city's startup scene: Balderton Capital, one of Europe's largest venture firms, has made two major investments in Russia already. Partner Dharmash Mistry now spends much of his time in Moscow. It's not all good news, of course. Success as a founder can be perilous: in April this year, a day after he was named by Forbes Russia as one of the country's richest businessmen, security-software mogul Eugene Kaspersky learned that his 20-year-old son had been kidnapped (he was later freed). No one was surprised: being wealthy in Moscow can sometimes be dangerous.

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Edward Shenderovich, founder and managing partner of Kite Ventures, a Moscow-based early-stage venture fund, says that other liabilities inherent in doing business in Russia can delay rapid progress. "Investors want to alleviate risk, which means control," he says. "That means more money flowing to weak entrepreneurs prepared to give up that control, instead of strong entrepreneurs who want to retain and build their own companies. The results are poor."

More mundane, but no less of a challenge for future growth, is a particularly Russian problem: finding good managers. Moscow is home to some of the most brilliant programmers in the world, but finding executives able to manage them is challenging. That said, Russian brashness rather suits entrepreneurship -and not just because founders here are unusually resourceful, bloody-minded and determined. "Russia is heir to the Soviet empire," explains Shenderovich. "Psychologically, Russians still have a competitive, imperial mindset, and compare themselves only to the US. So if there's a company doing well over there, then the general reaction is: we must build one here."

Fortunately, the market at home is large enough to accommodate and sustain such attitudes. Whether it can resolve some of the fundamental disconnects with western Europe and the US, as it will need to if it has truly global aspirations, remains to be seen.

1. Kupivip

12 Savvinsky Lane

Dubbed the Vente-Privee of Russia, shopping club KupiVIP just closed a $55m (£34m) funding round. The company has seven million registered members. It is hiring 30 staff a month and revenues are growing 600 per cent year-on-year.

So far, so familiar: this is just another successful ecommerce business. But the eccentricities of doing business in Russia have left KupiVIP with a very different model from its western counterparts.

For one thing, few people use credit cards in Russia. Cards only took off here about ten years ago, and today fewer than 15 percent of citizens have a credit or debit card. Cash is king.

Workarounds such as electronic prepayment systems are being deployed rapidly, but the issue is trust: Russian consumers have little faith in online retailers, preferring to pay on delivery.

A strategic mistake made by early Russian ecommerce companies was allowing consumers to pay after products were delivered. Too often, they simply didn't, which stunted growth for online supermarkets. Part of the reason for that is the absence of any reliable delivery methods apart from the state postal service, so any ecommerce business planning to deliver goods to its customers' homes has to invest in private logistics. Prepayment doesn't work unless your physical delivery mechanisms are trusted and reliable, which is why cash on delivery for goods is likely to remain the pre-eminent payment method for at least another five years.

To suggest KupiVIP represents an idiosyncratic spin on the traditional ecommerce business is an understatement. It faces every one of the unique challenges faced by online businesses, yet, somehow, it's making it work.

The company's chief executive Oskar Hartmann (above) says: "In the Valley, people are getting hung up on integrating with Twitter and Facebook, but in Russia the core business models are yet to be uncovered. There's still room in travel, real estate...you name it."

2. OZON.ru

14 8-Marta St

If KupiVIP is Russia's answer to Vente-Privee, OZON.ru is its answer to Amazon. The company began with books before diversifying into electronics, and will soon add clothing. "Amazon was lucky, though," says CEO Maelle Gavet. "They had UPS and others. We can't use the Russian postal system." Instead, OZON.ru created its own network of 500 distribution centres across Russia. It even sells the use of this network to other companies.

One of the only companies in Russia to attempt to sell, well, everything, OZON.ru has - again, like Amazon - developed a merchant service that enables individual vendors to leverage its platform.

In a final gesture of imitation-cum-flattery, OZON.ru has built its own version of the Kindle, called the OZON Galaxy, and has begun to sell ebooks in earnest.

OZON.ru is the largest online retailer in Russia and the most-visited online store on Runet, the Russian-language web.

But to achieve that goal, it will have to overcome the same obstacle as KupiVIP: namely, that only 14 percent of Russian internet users -- themselves only 35 percent of the population -- make purchases online. "People have a trust issue in general in Russia and this becomes more obvious when it comes to online retail," Gavet says. She is focusing her resources on educating consumers about the safety and reliability of online payments, as well as fixing another problem endemic in the Russian market. "My obsession is improving the customer experience, which is not a priority for a lot of companies here."

3. Mail.ru

The tipping point at which advertising becomes a viable revenue channel for online services occurs at around 45 percent penetration: that is, when almost half a country's population is online. And no service is better positioned to take advantage of deep internet penetration -- nor so dependent on it for survival -- than free email services.

But even though only around 60 million of Russia's total population of 143 million is online, Mail.ru is about to file for an IPO: one of the first great watershed moments in the Russian internet industry's history.

It could have been so different. When the web bubble burst in 2000, Mail.ru's plans for expansion collapsed, and the company was forced into a merger with NetBridge. The merger worked: today, Mail.ru is a household name nationally. mail.ru

Eastern opportunities

4. Avito.ru

Launched in 2007, Avito.ru is Russia's leading online classifieds site, attracting seven million visitors a month. The company just raised $26m in funding from external investors, including Stockholm-based Northzone Ventures and major shareholder Investment AB Kinnevik.

5. Tvigle Media

Similar to London-based Crane.tv, but for a mass-market audience, Tvigle is a hybrid media and tech company. It distributes short video content via mobile and broadcast networks, and the company's own apps. It also works with professional filmmakers. tvigle.ru

6. Yandex

With a 64 percent market share, Yandex is Russia's largest

search engine. It also processes online payments through Yandex.Money.

The company went public in May 2011, with 52 million shares sold at $25 each, raising $1.3bn -- investors being hungry for a slice of Russia's only serious IPO in years.

7. Darberry

Acquired by Groupon in August 2010, and promptly renamed Groupon Russia, Darberry was an overnight success thanks to its imitation of the coupon-deal startup. Founder Elena Masolova was unrepentant about her cloning strategy. Groupon also expanded into Japan by buying a local clone.

8. Begun

Begun -- a contextual advertising service based on customer behaviour-motivated publicity techniques -- operates the largest advertising network in Russia.

It was the subject of a failed $140 million acquisition attempt by Google in 2008 -- the Russian Federal Antimonopoly Service blocked the sale.

9. Runa Capital

Runa Capital, a VC fund founded in August 2010, recently announced a cash total of $50m. The company's focus is Russian startups -- such as HivExt, an app development platform -- that have the potential to compete globally.

10. Andrey Jessel

A serial entrepreneur Kessel was formerly an investment manager for Amadeus Capital Partners, following roles in telco and software companies. Kessel divides his time between the UK and Moscow, investing in and advising startups.

11. Edward Shenderovich

Russian-American Shenderovich is the founder of Kite Ventures, a Moscowbased venture fund whose investments include Darberry (now Groupon Russia) and SponsorPay. Shenderovich has also invested, through Kite, in Altergeo and Kanobu.

12. Yuri Milner

Digital Sky Ventures head Yuri Milner has cult status in Europe and Silicon Valley after a series of colossal investments in Facebook, Zynga, Twitter and Groupon. He has guaranteed a $150,000 investment for every new startup in the Y Combinator incubation project.

Where to meet

Communist Creative Loft

Demand for space from early-stage startups means that the Communist Creative Loft, a club-cum-office resembling London's TechHub, is a hive of activity.

Located in the Danilovskaya Manufactory business centre (below) in the south of the city, the space rents out desks for £170 per month.